Legal Briefs

Avoiding Product Liability In A Litigation-Happy World

By Ray M. Aragon, Esq. and Megan Kinsey-Smith, Esq.*
McKenna Long & Aldridge LLP

Avoiding Product Liability In A Litigation-Happy World
In recent years, it has been hard to read a newspaper without finding a story about the latest huge verdict in a commercial product liability case. McDonalds gets sued (and loses) because its coffee is hot; a jury awards a car owner $4 million in punitive damages because BMW repainted a new car; Nike is sued when a jogger trips on a shoelace; flyers demand $5 million in damages from an airline for a cat that escaped its cage. Such claims - each more outrageous than the last - seem so outrageous that they even are funny. You can't read them without laughing. Hot coffee, ha! Those crazy juries!

At least, lawsuits like that are funny when they happen to someone else. Really, what's a few hundred thousand dollars to McDonald's, or a few million, more-or-less, to General Motors? But the thought of liability arising from a broken leash, a muzzle that breaks, resulting in human injury, or a defective collar (defective because the customer's dog or another dog could eat the rhinestones) brings the issue a lot closer to home. Recent news reports that American pet food manufacturers unknowingly purchased, processed and shipped tons of melamine-contaminated dog and cat food -- followed by finger pointing and threats of lawsuits -- brings the notion of product liability out of the rare and into the commonplace.

For business owners, the conclusion to be reached is simple: Product liability isn't just someone else's problem anymore. Rather, it is a largely unpredictable, potentially devastating risk to all manufacturers and retailers. Like lightning, it can strike seemingly without warning. And, like lightning, it can't be fully controlled.

However, just as builders can use safety devices to limit the risk of lightning, careful planning and good foresight can reduce product liability from a potentially debilitating risk to a manageable business issue that in many ways is little different from the supply, market risk, and insurance issues that confront business owners and entrepreneurs every single day.

What is Product Liability?
The term "product liability" is often used but not well-understood (which is one of the reasons why someone else's product liability woes seem funny). In essence, a commercial product liability claim is a legal argument that the maker or seller of a product (1) had a duty to the purchaser or user of the product; (2) breached the duty by selling a dangerous product or one with an unreasonable or unknown risk of injury; and (3) caused damages (personal injury, pain and suffering, lost wages, medical expenses) as a direct result of the breach. An example: If you visit a restaurant to eat dinner, you are a "business invitee," with a reasonable right to expect that the premises will be reasonably safe and that the food will not be contaminated. If the restaurant breaches that duty, whether by leaving exposed electrical cords on the floor, causing shock, or by selling adulterated or contaminated food, causing sickness, it is likely to be liable for injuries, medical expenses and lost wages caused by its negligence. Liability also is likely to arise when a seller of a product fails to warn of its risks, when it negligently or mistakenly misrepresents the fitness of the product for a particular use, or when it makes claims for a product that go beyond every day "puffing" and into knowing or negligent misrepresentation.

How Product Liability Arises
Products liability makes not only the original manufacturer of the product potentially liable, but also anyone else along the chain - including the distributor and retailers - whether the product was changed or not. Knowing that you may be liable for the "wrongs" of another entirely separate company underscores why the U.S. retailer must be aware of the potential consequences and implied liabilities that can attach to its products.

Most product liability in the U.S. is based upon a negligence standard, where a plaintiff must show that the defendant breached some duty of care (i.e., dangerous design, faulty maintenance). In this case, the defendant must have failed to meet his duty (sometimes called the "standard of care" or the "reasonable man standard") to an injured plaintiff. On the other hand, in some circumstances in which a purchaser has a right to assume that s/he will not be injured by unknown risks of a product (i.e., that the medicine s/he ingests is actually medicine, and not plain water or poison) liability can be assessed even if the manufacturer took every reasonable precaution. In such circumstances, liability does not depend on the degree of carefulness by the defendant, but on the mere fact of unexpected injury.

Three Types of Product Liability.
There are three ways in which a product can be defective. They are: design defects, manufacturing defects, and defects in warnings. Design defects are inherent; they exist before the product is manufactured. For example: while the product might serve its purpose well, it is unreasonably dangerous to use as designed. On the other hand, a manufacturing defect occurs during the construction or production of the product. Typically, only a few out of many products of the same type are flawed in this manner. An example here would be if the product, say a dog harness, had weak stitching, thus allowing a dog to break free easily and either gets injured by running into the street or causes harm to another. The third potential defect is a defect in the warnings, which deal with improper instructions and failures to warn consumers of potentially hidden dangers in the product. It is this type of "defect" that led to McDonalds having to put labels of "Caution, Hot" on your cups of morning coffee.

Why We Should Care.
What do these fancy words mean to a business owner? Simply this: The risk of product liability can seem like a tiny possibility of an enormous problem (like getting hit by lightning). This may be true, but just as we don't let our children play in a lightning storm, even though the risk is very small, we should not ignore the small but potentially devastating threat of product liability arising in our businesses.

Product Issues Close to Home.
The need for businesses to be aware of product liability issues has been brought home by a number of recent occurrences. In particular, in the past year there have been recalls of a number of pet-related products. Many of these products originated in China, which provides over $250 billion worth of products to the U.S. market each year. Of 152 products recalled by the Consumer Product Safety Commission this year, more than two thirds were from China. Clearly many products sold by APPMA members originate overseas, in China or in other countries where quality control issues may arise.

A problem with this new reliance on foreign made goods is that many of these manufacturers have no U.S. – based assets and may not have insurance for product liability claims. While these products may present a financially attractive option for U.S. distributors, it is often forgotten that these manufacturers may be the subcontractor of a subcontractor of a subcontractor, and may not even be a corporation. In other words, the traditional model of the manufacturer standing behind its product, being financially responsible for any damage and personal injury caused by the product and being agreeable to suit in the U.S., is not today's reality. More realistic is the risk of theU.S. distributor standing alone to face liability for a product it neither designed nor manufactured. This is of particular, current concern because the risks in the pet product business, which historically has been a low-liability business, may be rising. The liability for injuries to people continues to rise, and even more alarming, the historical (and still dominant) legal structure that considers pets and animals as personal property is being challenged in state after state, with plaintiffs seeking huge damages for the injury or death of a beloved family dog, cat or lizard.

What to Do.
To combat such risks, companies must take a more proactive interest in the products they buy from overseas or unknown suppliers. Knowledge of a supplier, including its financial and insurance picture, goes a long way toward avoiding product safety problems. A company with a good track record, and with insurance, is likely to have some systems in place to avoid creating safety issues. Indeed, long-term relationships with stable companies provides insurance of a different sort, and at least some comfort that the company will be there to share the risk of a safety issue arising, with risk shared through contractual or legal indemnity. (In contrast, one of the Chinese gluten factories involved in manufacturing ingredients for the contaminated pet food literally disappeared, razed to the ground overnight, after the quality issues became apparent.) Education on quality assurance and monitoring the products we distribute or sell is another way of avoiding product liability. Insurance, including specialized products liability coverage and "excess" general liability coverage, helps a company survive when a product liability issue arises.

In general, minimizing the risk of liability in a world where product liability risks loom large generally requires no more of business owners then responsible practice. A culture of safety is an important attribute of any responsible organization and this should include being aware of it products in the hands of the consumer. Prudent firms review design production, records keeping and marketing procedures as well as customer information material to ensure the safety of their products with consumers. Attention should also be paid to quality assurance systems.

At a minimum, to protect yourself, you should:

During contract negotiations address liability and indemnity issues, with qualified counsel if necessary.
Ensure that your business has adequate insurance coverage, including umbrella policies and excess coverage, and ensure that the insurance covers product liability claims.
Negotiate and put in writing how you and the manufacturer will jointly handle recall and warranty issues.
Obtain a certificate of insurance from the manufacturer's liability insurance carrier, and insure that the levels of coverage are adequate to protect the supplier, and your business, from liability claims.
Obtain additional insured vendor's status on the certificate and require 30-day notice of any cancellation or non-renewal.
Obtain indemnity agreements from the manufacturer(s) of the product.
Work with the FDA or CPSC when a problem occurs; compliance with applicable regulations and standards may aid in defending product claims.
Institute a document retention policy, and train employees on the policy; make it a priority to periodically audit the policy and compliance.

Not addressing product liability issues is just like stepping outside in a lightning storm holding a metal umbrella and hoping for the best. However, in both law and business, hope is rarely a good strategy. In the current environment, and with the tide of product liability litigation and damages on the rise, clear thought and clear action on product liability is simply good business.

*By Ray M. Aragon, Esq. and Megan Kinsey-Smith, Esq. Ray is a partner and Megan is an associate with McKenna Long &Aldridge, LLP in Washington, DC, where they focus on product liability issues.